Madoff victims’ payout nearing $7.2 billion – trustee

(REUTERS) – Victims of Bernard Madoff’s massive Ponzi scheme will get a fresh $322 million payout if a U.S. judge approves the request by the trustee liquidating the convicted fraudster’s firm, bringing the recovery total to more than $7 billion.

The trustee, Irving Picard, said on Monday he would seek permission from a U.S. bankruptcy judge in New York to begin the fifth interim distribution of payments, which would average $299,900 and range from just under $400 to more than $60 million.

The announcement came five weeks after Picard said he had reached three settlements with various defendants, totaling more than $642 million.

All told, Picard has recouped about $10.5 billion, roughly 60% of the $17.5 billion of principal he estimated was lost by Madoff customers in the Ponzi scheme, which was revealed in December 2008.

Picard has allowed 2,547 claims related to 2,213 accounts that victims held at Bernard L. Madoff Investment Securities LLC. Once the fifth interim distribution is complete, he said, 1,154 accounts will be fully satisfied.

A court hearing to consider approving the payout has been scheduled for Jan. 15. Madoff, 76, is serving a 150-year prison term after pleading guilty in March 2009.

Five former Madoff employees were sentenced to prison terms of two to 10 years earlier this month, following their conviction in March of fraud and other charges for helping Madoff conceal his fraud for decades.

Fifteen people, including Madoff himself, have been convicted at trial or pleaded guilty in connection with the Ponzi scheme.

Ex-Madoff computer programmer gets 2-1/2 years prison for fraud

(REUTERS) – A former computer programmer for Bernard Madoff was sentenced to 2-1/2 years in prison on Wednesday for helping the imprisoned fraudster carry out his multibillion dollar Ponzi scheme.

The sentencing of George Perez, who worked at Madoff’s firm from 1991 until its collapse in 2008, came nine months after a Manhattan federal jury found him guilty and a day before the sixth anniversary of Madoff’s arrest.

U.S. District Judge Laura Taylor Swain also ordered Perez to forfeit a symbolic $19.7 billion jointly with other defendants who worked at Bernard L. Madoff Investment Securities LLC.

“He must be punished in a way that’s severe and commensurate with his crimes,” she said.

Perez, 48, was the fourth of five former employees to be sentenced following their convictions in March on all counts, including securities fraud and conspiracy in the first criminal trial over Madoff’s Ponzi scheme.

Perez told Swain he was “sad and tired,” adding: “I’m terribly sorry for the role my work played.”

Madoff is serving a 150-year prison term after pleading guilty in 2009 to running a scheme that cost investors more than an estimated $17 billion in principal.

Courtesy of the United States Department of Justice

Prosecutors said the employees knowingly propped up Madoff’s fraud by creating fake documents and backdating trades. Prosecutors said Perez developed and maintained computer programs that enabled the fraud to multiply.

The defendants have said Madoff deceived them into believing his investment advisory business was legitimate. They are expected to appeal their convictions.

Daniel Bonventre, Madoff’s former back office director, was sentenced Monday to 10 years in prison. On Tuesday, former Manager Annette Bongiorno and Computer Programmer Jerome O’Hara received six years and 2-1/2 years, respectively.

All the defendants received less prison time than requested by prosecutors, who in Perez’s case had asked for more than eight years.

Matthew Schwartz, an assistant U.S. attorney, ahead of Perez being sentenced, urged Swain to avoid issuing further light sentences for the Madoff defendants to avoid setting a precedent in future fraud cases.

“Judges will have to explain how small-time crooks in front of them were worse than the defendants in this case,” he said.

Swain nevertheless gave Perez a less-harsh sentence than prosecutors wanted, saying he was less culpable than other defendants.

Fifteen people have been convicted in connection with Madoff’s fraud. A final defendant, former Portfolio ManagerJoann Crupi, is scheduled to be sentenced next Monday.

Madoff aide Bongiorno gets 6 years in prison for aiding fraud

Another day, another sentencing of a former aide to disgraced hedge fund manager Bernie Madoff.

Annette Bongiorno, who served as a portfolio manager at the firm where Madoff perpetrated his multi-billion dollar Ponzi scheme, was sentenced to six years in prison on Tuesday for her role in helping her former boss defraud investors, according to Reuters. Bongiorno is one of five former Madoff aides facing sentencing over the course of a week and her sentence comes one day after a federal judge in New York handed her former co-worker, former Madoff operations director Daniel Bonventre, a 10-year sentence for his role in the scheme.

Prosecutors sought prison terms of up to 20 years each for Bonventre and Bongiorno, while portfolio manager Joann Crupi and computer programmers Jerome O’Hara and George Perez are the next to be sentenced. The five aides were all convicted on multiple counts of conspiracy and fraud in March for their roles falsifying documents and backdating stock trades as part of the massive Ponzi scheme discovered in 2008.

The government is seeking a sentence of at least 14 years for Crupi and more than eight years each for O’Hara and Perez.

A New York federal judge also ordered the group to forfeit the symbolic amount of $155 billion — which they will not be able to pay in full — as part of the government’s ongoing quest to compensate the investors victimized by the Ponzi scheme. Investors lost more than $17 billion principal through the massive fraud, which has led to the conviction of 15 people. Madoff himself was arrested in 2008 and began serving a 150-year sentence after pleading guilty a year later.

Reuters notes that attorneys for Bongiorno, who worked for Madoff for roughly four decades, had asked the court for leniency and hoped for a sentence between eight and 10 years for their client. Judge Laura Taylor said on Tuesday that Bongiorno deserved some leniency because she was not a “coldly calculating participant” in Madoff’s scheme, but rather had shown willful ignorance of her boss’s fraud, according to Reuters.

First of 5 ex-Madoff aides sentenced this week gets 10-year prison term

Six years after Bernard Madoff’s arrest, the disgraced hedge fund manager’s former operations director is also headed to prison.

Five former aides convicted of assisting Madoff in his massive Ponzi scheme are due to be sentenced this week, and the first to learn his fate is former Madoff back office director Daniel Bonventre, who received a 10-year prison term Monday morning in a New York federal court, according to Reuters.

Prosecutors had been seeking prison terms of up to 20 years for Bonventre and former Madoff portfolio manager Annette Bongiorno, who will be sentenced later this week. Also slated to be sentenced is portfolio manager Joann Crupi and computer programmers Jerome O’Hara and George Perez. All five were convicted on multiple counts of conspiracy and fraud in March for their roles falsifying documents and backdating stock trades as part of the multi-billion dollar fraud discovered in 2008.

The Ponzi scheme landed Madoff himself a 150-year prison sentence after he pleaded guilty in 2009.

The U.S. government is seeking sentences of at least 14 years for Crupi and more than eight years each for O’Hara and Perez.

A New York federal judge also ruled on Monday that the group of defendants must forfeit more than $155 billion as the government continues to seek recompense for the losses of Madoff’s victims. Investors lost more than $17 billion principal through the massive fraud, which has led to the conviction of 15 people.

Defense attorneys for the five former Madoff employees have asked the court for leniency, arguing that Madoff had deceived the defendants by leading them to believe that his investment business was legitimate.

Madoff’s son, Andrew, died in September after battling cancer and left more than $15 million in properties to his family. Madoff’s other son, Mark, committed suicide in 2010. Neither son was ever charged in connection with the Ponzi scheme.

Latest Madoff fraud deal pushes amount recovered to over $10 billion

Victims of Bernie Madoff’s Ponzi scheme will get another $500 million as part of a legal settlement announced on Monday, pushing the total amount they’ll recoup to over $10 billion.

The latest deal involves two Cayman Island feeder funds that withdrew money prior to the failure of Madoff’s investment firm, according to court-appointed trustee Irving Picard.

Their money would bring the total amount recovered to 60 cents on the dollar for victims of the fraud. In all, investors lost an estimated $17.5 billion in the scam.

“By any measure, the settlement terms are highly advantageous, not only to (Madoff’s) direct customers, but also potentially to the indirect investors in the Herald Fund,” Oren Warshavsky, Picard’s lead attorney, said in a statement.

In 2009, Bernie Madoff was sentenced to 150 years in federal prison for the scam that led to paper loses of $65 billion and cash losses of just over $17 billion.

So far, $5.25 billion has been paid out with the rest is either in litigation or held in reserve. Those with losses of up to $925,000 have been fully compensated.

As part of the latest settlement, court-appointed trustee Irving Picard agreed to release $1.6 billion to the Cayman Island funds, Herald Fund SPC and Primeo Fund. Both had placed most of their investors’ money with Madoff. But like many “indirect” investors with a net gain in the investment, the funds had been ineligible for payouts. By settling, those funds will finally get access and be eligible for a share of any future payouts from other sources.

Picard filed the settlement at the U.S. Bankruptcy Court in Manhattan. A judge must approve the agreement.

The news comes two months after Madoff’s son Andrew passed away due to lymphoma in September, leaving his children, fiancee and estranged wife over $15 million in property.

Andrew and his brother Mark, who committed suicide in 2010, alerted authorities about their father’s Ponzi scheme in December 2008.

Madoff son Andrew leaves over $15 million to his fiancée, family

This post is in partnership with Time. The article below was originally published at Time.com

By Elizabeth Barber, TIME

Andrew Madoff, the son of convicted fraudster Bernard Madoff, has left a will giving his children, estranged wife and his fiancée more than $15 million in properties, after his death from lymphoma earlier this month, reports Bloomberg.

Madoff’s willed holdings include about $11 million in “personal property,” plus about $4.5 million in real estate, Bloomberg says. The will was written in July and filed on Thursday in Surrogate’s Court in Manhattan.

Madoff, who died at 48 years old and was never charged with involvement in his father’s fraudulent financial empire, left all of his tangible property to his two daughters, Emily and Anne, Bloomberg reports.

One-third of his estate has been left to his estranged wife, Deborah West, while the remaining has been willed to his fiancée, Catherine Hooper, in the form of $50,000 payments each month for the rest of her life, says the New York Daily News.

Ruth Madoff, his mother, is not included in the will, Bloomberg says.

Madoff and his older brother, Mark, who committed suicide in 2010, worked on the trading desk of Bernard L. Madoff Investment Securities LLC. Their father, Bernard Madoff, handled client investments.

In December 2008, the two brothers alerted federal authorities to their father’s dubious investment practices, and in March 2009, the elder Madoff was sentenced to 150 years in federal prison for engineering a vast Ponzi scheme that financially wounded thousands of people and organizations, with total paper loses of about $65 billion and cash losses near $17 billion, the New York Times says.

No charges were filed against either of Madoff’s sons, who denied knowing about the scheme until their father confessed to them, and who both cut all ties with him after his sentencing.

Madoff redux: Would a red flag from JPMorgan really mattered?

JPMorgan Chase JPM faces the prospect of yet another multibillion dollar fine. This time, it involves Bernard Madoff, who scammed investors in one of the biggest Ponzi schemes in history.

The bank is expected to pay nearly $2 billion to end a criminal investigation into whether it adequately warned U.S. authorities about Madoff’s massive scheme. A settlement deal with the Justice Department could come as early as next week, five years after Madoff’s arrest.

The fraudster initially claimed he acted alone. Needles to say, that was hard for most anyone to believe, and we now know that was all a lie. What’s worth noting is that Madoff eventually ratted out JPMorgan — his bank for more than two decades. In a 2011 interview with the Financial Times, more than two years after his arrest, Madoff claimed “JPMorgan doesn’t have a chance in hell of not coming up with a big settlement.” He claimed “there were people at the bank who knew what was going on,” although JPMorgan has repeatedly denied this claim.

In 2008, the bank filed a “suspicious activity” report with U.K. authorities, but it didn’t file such a report in the U.S. Why?

Looking back, it’s hard to say whether that would have mattered, at least in terms of putting the former Nasdaq chief behind bars. Recall a damning 2009 report by the Securities Exchange Commission, which found that the agency responsible for regulating the finance world missed numerous red flags regarding Madoff’s business dating back to as early as 1992.

The report detailed six substantial complaints it received against Madoff. Three investigations and two examinations followed, but the agency missed the warnings because, as the report found, it was hobbled by inexperience and incompetence. What’s more, investigators were intimidated by Madoff, known at the time as a big fish on Wall Street, the report found. Many questioned Madoff’s consistently big returns and the volume of his purported options trades, but the SEC didn’t realize it was all a big Ponzi scheme because it never verified the trading activities through a third party.

“A simple inquiry to one of several parties could have immediately revealed the fact that Madoff was not trading in the volume he was claiming,” the report said.

In the end, it was Madoff’s two sons who turned him in. The SEC has received plenty of flak for missing the boat on Madoff, and the agency has promised to correct its failing. During her confirmation hearing, SEC Chairwoman Mary Schapiro repeatedly pledged there would be no more “sacred cows,” a reference to Madoff.

Maybe alarms coming from the nation’s biggest bank would have made a difference. Maybe not. Regardless, the Madoff settlement represents federal regulators’ effort to try to correct much of what was wrong with JPMorgan; it follows the bank’s record $13 billion settlement last month over the sale of toxic securities to investors before the financial crisis. JPMorgan did not immediately respond to a request for comment.

And whether justice is served depends on how you look at it. The Madoff-related settlement is expected to include a so-called deferred-prosecution agreement, which would list all of the bank’s alleged criminal wrongdoing. However, such an agreement stops short of an indictment so long as the bank pays the fines and acknowledges its wrongdoing — similar to the $13 billion settlement deal JPMorgan struck over bad mortgages.

You can see this piece of the settlement as justice, as admitting wrongdoing has been viewed on Wall Street as potentially spawning more shareholder lawsuits. But if you see jail time as justice, don’t hold your breath.

The Madoff saga is far from over

As Peter B. Madoff pleaded guilty last Friday, he tried to sell a doubting world the “Baby Brother” defense, painting himself as a victim, blinded by his big brother Bernie’s brilliance, beneficence and bullying.

Three and a half years after the world learned of Bernard L. Madoff’s 20-year Ponzi scheme, the Greek saga underlying the largest fraud in Wall Street history is not quite over. On March 12, 2009, Mr. Madoff pleaded guilty to all the federal charges filed against him, eventually receiving a 150-year prison term. Now, the supporting cast is having its turn.

In effect, his brother Peter’s defense was a preview of the one his daughter, Shana Madoff Swanson, and his nephew, Andrew, Bernie’s surviving son, may soon be offering for public consumption as prosecutors drag them into the spotlight. If the guilty plea performances by Bernie and Peter instruct them, the younger Madoffs will be offering variations of the “Daddy Done Me Wrong and Kept Me in the Dark” defense as they hope for deals that might carry only five-year sentences, such as a one-count charge of tax evasion.

Without naming Shana or Andrew, U.S. Attorney Preet Bharara upped the heat on them, declaring: “We are not yet finished calling to account everyone responsible for the epic fraud of Bernard Madoff and the epic pain of his many victims.” Few court observers believe the prosecutor was referring to the five former employees still awaiting trial or the eight employees and associates who have pleaded guilty and mostly await sentencing.

“The prosecutors have spent a lot of time on this,” explains Columbia University Law Professor John Coffee. “They have done the low-hanging fruit; they are now reaching to the medium-level fruit… Beyond the two kids, I do not know how much farther they will want to go.”

Peter, the former Chief Compliance Officer of the Madoff enterprise, confessed to a decade’s worth of fabricating documents designed to evade tens of millions in taxes and to help Bernard L. Madoff Investment Securities (BLMIS) evade Securities and Exchange Commission scrutiny.

During his 17-minute allocution — the often-scripted little speech defendants give to tell the judge they are sorry — Peter Madoff explained his falsification of documents as a function of trying to please his brother. “On several occasions, my brother and I engaged in money transfers in ways specifically designed to avoid payment of taxes,” he said. “I knew this was wrong. In addition, at my request, my wife was placed on the BLMIS payroll and for many years received compensation for a no-show job. At no time, however, did I suspect that my brother had stolen from anyone or that my family and I were receiving money that belonged to customers.”

Madoff insisted to U.S. District Judge Laura Taylor Swain that he had labored under the handicap of being seven years younger than Bernie and kept clueless about the Ponzi scheme until December 2008. “There was no doubt Bernie was the boss,” said the younger brother who had started working for the elder’s lawn sprinkler business in high school and collected more than $150 million over the course of their working relationship. “He never gave me any financial interest in the firm.”

Both junior Madoffs — Shana and Andrew — held significant jobs at the firm, while collecting millions of dollars that prosecutors can prove came directly from criminal enterprise. Each, as senior officers of the firm, may have committed acts that could be classified as criminal. So far, many of the allegations against them have been made public only in the civil complaints filed by Madoff bankruptcy trustee Irving Picard, who seeks to recover more than $255 million from the Madoff family.

The Justice Department deal limited Peter Madoff’s prison time to 10 years in prison on two criminal counts and forced him to surrender all his assets as well as most belonging to his wife Marion and their daughter Shana, who also was a compliance officer at the Madoff firm. Marion Madoff gave up claims to their Park Avenue apartment, house in Old Westbury, Long Island, New York and their Palm Beach, Fla. mansion in exchange for being left with “approximately $771,733 to live on for the rest of her life.”

Peter Madoff’s forfeiture deal also surrendered $2.26 million of Shana’s money from selling her five-bedroom week-end house with a gunite swimming pool in the woods of East Hampton, New York.

Like her father, Shana graduated from Fordham University Law School and collected hundreds of thousands of dollars a year after joining uncle Bernie’s firm in 1995 as a compliance counsel. Later elevated to BLMIS compliance director, both she and her father signed documents assuring the SEC that Madoff’s investment advisory business records were truthful and accurate. They certified to the government that the company’s investment advisory arm — the heart of the Ponzi scheme — had 23 clients and $17.1 billion under management, rather than the 4,900 customers whose statements purported to represent investments of $68 billion.

As the bankruptcy trustee put it, “It would seem impossible for her to carry out her compliance duties, year in and year out, without questioning or considering whether BLMIS’s IA (investment advisory business) was a fraud.” Speaking about the father-and-daughter act compliance team, the trustee’s suit continues: “Either they failed completely to carry out their required supervisory/compliance roles, or they knew about the fraud, but covered it up.”

Professor Coffee, a securities law expert, says: “Prosecutors can use the same charges as they did against her father, maybe not seeking 10 years, but I could see them giving her the choice of pleading to a felony conviction on the same grounds. She is a lawyer; lawyers don’t get the benefit of the doubt.They could say you knew this (SEC filing) was false, even if you did not know it was a Ponzi scheme.”

Andrew Madoff and his brother Mark, who committed suicide on the second anniversary of their father’s arrest, were co-directors of trading for the brokerage, market-making and propriety trading parts of the firm, which they have claimed were consistently profitable. They also were controllers and directors of the related firm, Madoff Securities International, Ltd.

In fact, court documents filed by the bankruptcy trustee, the SEC and the Justice Department have described the business segments overseen by Andrew and Mark and Peter as underwater for years and kept afloat by transfers of hundreds of millions of dollars from the firm’s London office and from its advisory business from at least 2000 through 2008. The money, authorities say, was investors’ money falsely shown as profits of the firm’s securities trading, which actually was non-existent.

As the trustee Picard states, “Perhaps most obviously, as co-directors of trading, Andrew and Mark were – or should have been –aware that no one was effecting trades within the IA (investment advisory) business, either in London or New York.” The brothers also knew, Picard says, that there was a “material inconsistency” because the business segments that they ran did not generate net income that was anything close to the profits being declared by Madoff.

While Shana Madoff faces the problem of having signed false documents to the SEC, Andrew Madoff may be more concerned about possible testimony from Enrica Cotellessa-Pitz, the controller for BLMIS who has pleaded guilty to four counts and is co-operating with prosecutors in hopes of getting a light sentence. According to court papers, she worked primarily for the businesses run by Bernie’s sons, proprietary trading and market-making, and cooked the books to make those units appear more profitable.

The bankruptcy trustee says Andrew Madoff took out nearly $74 million from the firm, including more than $14 million in profits from fake stock trades that never occurred. In those investment advisory accounts held by Andrew and his family, documents also were created to make it appear that profits were generated by capital gains, rather than ordinary income. Tax evasion of that sort can carry a five-year sentence.

Lawyers for Shana Madoff Swanson and Andrew Madoff did not respond to requests by Fortune for comment.

FORTUNE – Pulitzer Prize-winning journalist James B. Stewart has written for years about business and politics, but as the scandals of the last decade mounted — Enron, WorldCom, Adelphia, Tyco, culminating in the shocking Bernie Madoff Ponzi scheme — it occurred to him that they all shared a common thread: lying. In his new book Stewart explores how and why instances of perjury and false statements are on the rise at the highest levels of business, politics, sports, and culture. Perhaps no case illustrates it better than that of Madoff. Judged by the duration and magnitude of his fraud, Madoff would seem to be the most cunning and skilled of liars. But as the following excerpt from his book, Tangled Webs, shows, Madoff repeatedly changed his story, he contradicted himself at every turn, and written records flatly disproved many of his assertions, had anyone bothered to check. Worst of all, the SEC knew he was lying and was one phone call away from catching him.

Thomas Thanasules paused as he sifted through a pile of e-mails he’d gotten from Renaissance Technologies, arguably the most successful hedge fund in the world. “Please keep this confidential,” one said. “I have kept this note to a restricted circulation,” read the reply. What was so secret? It was April 2004, and as a young compliance examiner for the Securities and Exchange Commission in New York, Thanasules was struggling to keep up with the burgeoning number of new investment vehicles known as hedge funds.

Some of the most mysterious of the funds were the so-called quantitative, or “black box,” funds, which used complex computer programs. Renaissance Technologies had soared to the top of this secretive world. RenTec, as it was known to traders, was founded in 1982 by James Simons, an MIT- and Berkeley-trained mathematician who used sophisticated mathematical models to invest in markets. He hired theoretical physicists, philosophers, statisticians, mathematicians like himself — but no MBAs. His was the ultimate black-box trading operation. Renaissance had several funds; its best known, the Medallion fund, was largely restricted to Simons himself and other Renaissance employees. Medallion had racked up astounding average returns of over 30% a year.

Given its prominence, size, and remarkable returns, RenTec had naturally attracted the interest of the SEC, which had asked it for numerous documents and records, including internal e-mails. So far, Thanasules hadn’t found anything suspicious, but as he sifted through the assets of Meritage, Medallion’s sister fund run out of San Francisco by Simons’s son Nat, he discovered that Meritage didn’t simply invest directly in other hedge funds, like most funds-of-funds. It had entered into a so-called total return swap with another fund-of-funds, HCH Capital, effectively paying HCH for the returns and risk associated with one of its investments. So far it looked as if it had been a very profitable investment for Meritage, since the fund it had swapped into had delivered extraordinarily consistent and quite high returns. It looked as if it had never had a down quarter, even after the technology bubble, and only a handful of down months.

Meritage had to gain access to the fund using a swap because the fund was so sought-after that only the chosen few were allowed to invest, handpicked by the fund’s manager. Given Simons’s reputation and track record, most funds would have been thrilled to have Meritage among its investors. But when Meritage tried to invest, the fund’s manager, Bernard L. Madoff, had turned Simons down.

The name Madoff meant nothing to Thanasules. But from the RenTec e-mails, he could tell that Madoff was a subject of concern to the people there, who were, after all, some of the most sophisticated in the hedge fund world. Since they were only indirect investors in the Madoff fund, they didn’t get account statements or have direct contact with Madoff, relying instead on what they could learn from HCH and other sources. They didn’t really know what strategies Madoff used, or how he earned such consistent returns — more consistent than even their Medallion fund. On Nov. 13, 2003, Nat Simons wrote an e-mail to his father and other investment committee members:

We at Meritage are concerned about our HCH investment. First of all, we spoke to an ex-Madoff trader (who was applying for a position at Meritage) and he said that Madoff cherry-picks trades and “takes them for the hedge fund.”

This alone was a red flag, since cherry-picking is illegal unless the practice is fully disclosed to investors. Cherry-picking consists of executing many trades, and then allocating the most profitable ones to favored investors, inflating the returns at the expense of others.

The e-mail continued:

He said that Madoff is pretty tight-lipped and therefore he didn’t know much about it, but he really didn’t know how they made money. Another person heard a similar story from a large hedge fund consultant who also interviewed an ex-trader. The head of this group told us in confidence that he believes Madoff will have a serious problem within a year … Another point to make here is that not only are we unsure as to how HCH makes money for us, we are even more unsure how HCH makes money from us; i.e., why does [Madoff, who charged minimal commissions] let us make so much money?

Simons suggested pulling out of the HCH position entirely.

To Thanasules, the e-mails raised a host of troubling questions and carried extra weight because they came from Renaissance. If Renaissance executives couldn’t figure out what Madoff was doing, who could? He called the compliance officer at RenTec, who said that Meritage had reduced its exposure to Madoff, though not because of the concerns expressed in the e-mails. Still, Simons later said that “we were very worried about the position” and cut it in half because of the concerns expressed in the e-mails. He added that they would have eliminated it entirely except for one reason: They understood that the SEC had examined Madoff and given him a clean bill of health. But eventually they got rid of it entirely.

Armed with copies of the e-mails, Thanasules went to his supervisor, branch chief Diane Rodriguez. The facts they alleged — a nonindependent auditor, incomprehensibly consistent returns with near-perfect timing, and, most of all, the inability of Paul Broder, RenTec’s risk manager, to identify any trading volume or counterparties essential to execute the strategy — led Thanasules to wonder “whether Madoff is doing these trades at all,” as he described his thinking. On April 20, he sent an e-mail to Rodriguez.

Eight months later Robert Sollazzo, co-head of the SEC’s broker-dealer examination program, referred the Madoff case to John Nee, the compliance division’s assistant director. Sollazzo also recruited two young examiners, Peter Lamore and William Ostrow.

Sollazzo especially wanted Lamore, since he was one of the few examiners who had firsthand experience working for a hedge fund and trading options, and had waited to begin the examination until Lamore was available. Lamore was stocky, with neatly clipped brown hair. He had the upright demeanor of a military man, and he’d spent five years in the U.S. Coast Guard after graduating from the Coast Guard Academy. Ostrow had more experience, having been at the SEC for five years. He joined the agency right after graduating from the New York Institute of Technology with a degree in finance. The name Madoff meant little to either Lamore or Ostrow, although both knew that his firm was a large market maker.

Madoff snows the novices

When Lamore and Ostrow arrived at Bernard L. Madoff Securities on April 11, 2005, Madoff himself came into the lobby to greet them. The examiners were impressed that Madoff — the head of the firm — was handling their examination. Usually it was the compliance officer, or someone else designated to act as a liaison with the SEC. Madoff didn’t know why they were there, and they hadn’t wanted to tip their hand. Lamore and Ostrow may have been a little unsure themselves. Contrary to policy, no branch chief was assigned to supervise them. They’d never been given any formal instructions, nor had they drafted any planning memorandum.

After two days of gathering documents and reconciling account statements, they had their first official interview with Madoff. They hadn’t seen anything that suggested he was running or advising any hedge funds, so Ostrow asked a basic question: “Do you do a retail business?” “No,” Madoff answered, “I don’t manage money.” Madoff insisted that his firm was simply a market maker and traded for its own accounts. It didn’t generate investment advice or execute strategies. As Ostrow later put it, “According to Bernie, there was no investment advisory business.”

This was an astounding proposition, since the premise of the Renaissance e-mails was that Madoff was managing money for hedge funds (including Renaissance) and generating returns that seemed impossible to explain. And what about all the feeder funds that the published reports said were funneling money to Madoff? If Madoff was simply a market maker, there was no reason for Ostrow and Lamore to be there. Neither believed him, but Madoff managed to divert them from this line of inquiry, regaling them with stories about Wall Street trading and the evolution of the business. Afterward, Lamore e-mailed a colleague to report that the interview lasted more than two hours and ended after 6 p.m. But he made no mention of Madoff’s startling claim, and seemed in a lighthearted mood. “Was there a storytelling class when you attended Hofstra because this guy has a story about everything? … Does everyone miss me in the office yet?” he wrote.

By late May, Lamore and Ostrow had been on the Madoff premises for nearly two months. They spent the entire time in a conference room, and neither ever ventured onto the 17th floor, which is where Madoff indicated that routine back-office tasks were conducted. Madoff continued to regale them with stories about the evolution of Wall Street, which Lamore found simultaneously “captivating” and “distracting,” and impressed Lamore with his “incredible background of knowledge.” Madoff dropped names of SEC officials he knew and mentioned that he was on the “short list” to be the next SEC chairman.

But Madoff was also becoming impatient with the investigators’ presence. On May 25, Ostrow and Lamore scheduled a meeting to confront Madoff about his assertions that he didn’t manage money. They laid two articles on the table and pointed out that both flatly contradicted his repeated claim that he didn’t advise any hedge funds or manage their money. With the articles in front of him, Madoff abruptly reversed himself. “We do execute trades on behalf of brokerage firms and institutions, which include a number of hedge funds,” he now acknowledged. “They use a model – algorithm — that we developed.” At first he said there were just four hedge funds using the model, and named Fairfield Sentry, Thema, Tremont, and Kingate Global. But then he said there were actually 15 clients, including two corporate accounts, but all of them were foreign.

Lamore and Ostrow asked Madoff how the model worked. Madoff said he had developed it eight years earlier and that he was the only person allowed to execute trades using it. He said he used a computer server separate from the firm’s market-making activities. He called the strategy incorporated in the model a split-strike conversion strategy, but described something quite different: a “basket” of about 50 stocks used to replicate the S&P 100, but said it was a “long only” position with no options trading or selling short. He said the model had stopped using options about a year before.

Lamore and Ostrow were flabbergasted that all this information was only now being volunteered, after Madoff had repeatedly and flatly denied that he had any outside clients. At this juncture, Madoff effectively pulled the rug out from under them. He said he had already disclosed all of this trading to the SEC about a year and a half earlier, when the SEC’s Office of Compliance Inspections and Examinations (OCIE), a separate, Washington-based operation whose primary mission is to detect fraud, examined him. “Lori Richards has a whole file I sent her with this info,” Madoff said. “They have it.” (Richards was a compliance official with the OCIE.) Ostrow and Lamore were embarrassed that this was the first they had heard of it. Madoff sensed he had them at a disadvantage and adopted a “condescending” tone, as Lamore later put it. Ostrow and Lamore were reduced to asking whom Madoff had dealt with besides Richards so they could follow up. Despite the bombshells Madoff had lobbed, Ostrow and Lamore, as well as their superiors, were diverted by the embarrassing disclosure that, as one put it, “the left hand didn’t know what the right hand was doing” at the SEC.

In a conference call five days later, OCIE officials confirmed that they had indeed investigated Madoff, and although it was still an open investigation, “for all intents and purposes it was finished.” They hadn’t reached any conclusions or issued a final report, which Lamore thought was strange. It also struck him that the Washington officials kept stressing how important Madoff was. Ostrow noted that “I don’t know who said it — someone from OCIE basically: ‘He’s a very powerful person, Bernie, and you know, just remember that.’ But basically just ‘He is a very well-connected, powerful person.’ ”

Ostrow was eager to continue the investigation, and was planning visits to Fairfield Sentry and other Madoff feeder funds. He was especially eager to see how the split-strike conversion strategy could be executed without Madoff trading options. But on June 16, Nee met with Ostrow and Lamore and directed them not to visit or contact any of Madoff’s feeder funds. Ostrow recalled that Nee warned them that Fairfield “is a $7 billion customer and if you go and raise red flags there and they go ahead and pull all of their money from Bernie and we’re wrong, then we’ll be sued personally or the SEC itself.” (Nee denied that fear of lawsuits was a factor, but acknowledged, “We’d have to be very careful about going to a hedge fund client.”) Nee told them it was time to end the examination and move on to their next assignment.

A few months later, in October 2005, after Harry Markopolos came forward with his now famous report alleging Madoff was running a Ponzi scheme, the SEC launched another investigation out of New York. Markopolos’s report was assigned to Meaghan Cheung, a branch chief in the enforcement division, and Simona Suh, a staff attorney. Suh did some Internet research on Markopolos, which she forwarded to Cheung, including a quote from Markopolos: “I can teach you how to spot fraud and what to do about it, so you aren’t in the hot seat.”

“I have some qualms about a self-identified independent fraud analyst, but who knows,” Cheung responded, betraying an almost immediate skepticism of Markopolos.

Now that the Madoff case had been designated an informal investigation, it was finally entered into the SEC database, and the staff could issue subpoenas and take sworn testimony. On Friday, May 19, 2006, Madoff arrived at the SEC’s New York office for his testimony with Cheung and Suh. It was the first time Madoff had been required to leave his home turf in Midtown, and to testify under oath. As he had before with Lamore and Ostrow, Madoff recounted at length his humble origins, his rise on Wall Street, the history of trading commissions, and how the firm came to “execute” trades for hedge funds. He rarely missed an opportunity to digress on an irrelevant topic, such as the intrusion of television screens onto trading floors.

“Let’s get back to the point,” Suh said. “If you could, please explain what makes you the trader?”

“Forty-some-odd years of experience,” Madoff answered. “To me that’s the best answer I can give you … I have a relationship with the regulators and the firms in general in the Street, and I have never, ever — I know the rules and regulations better than most people because I drafted most of them.” He continued: “It’s experience and using what tools are available to me which are perfectly open, legal tools to use,” he said. “The advantage I have and the reason I don’t need to be represented by lawyers is I’m not doing anything wrong.”

Madoff seemed eager to discuss the split-strike conversion strategy and proprietary model that was uniquely his creation. He likened it to cooking using a blender: “So I’m saying that you’re cooking a meal. You put in carrots and oranges and a whole bunch of stuff. You put it into a blender. If you let it run for two minutes, it’s going to have one consistency. If you let it run for three seconds, it’s going to be a different consistency and so on and so forth. Depending on what you’re looking for, everybody is looking for different things, so people design their systems to say, ‘I don’t care about this stuff, I care about that.’ Again, I don’t attach too much importance to the information that flows out of that stuff. It’s available to anybody. It’s not unique data … Some people ‘feel’ the market.”

The rest of Madoff’s testimony was replete with contradictions. He said he maintained segregated accounts with the Depository Trust Co., or DTC; previously he’d said there was just one account. He said he traded options over-the-counter through the New York office, not in London, as he’d told Lamore. He said he had electronic records of the options contracts; earlier he’d said no documentation existed. And with a firsthand witness who could contradict him sitting at the table, he baldly denied he had told Lamore that he’d stopped trading options. Just about the only consistency was his assertion that “some people can just feel the market.”

Lamore was furious at Madoff’s testimony, which implied that Lamore had either lied about or misstated his previous accounts of Madoff’s answers. “I just remember sitting there in the testimony thinking, ‘He’s lying,’ ” Lamore later said. “It was just remarkable to me.” According to Ostrow, Lamore “was jumping up and down at the attorneys and letting them know about all the discrepancies.”

Lamore thought there was enough to refer the case to the Justice Department immediately. At the least, Madoff was lying under oath, which raised the question why. As Lamore put it, “So I’m sitting there thinking, You got to be kidding me. I mean, this is huge. This guy just lied on the record to your face.” But the enforcement lawyers, especially Cheung and her superior, didn’t seriously entertain the possibility. As Ostrow put it, “Peter [Lamore] was extremely upset that the [enforcement lawyers] weren’t taking seriously the fact that everything was a lie. There were so many contradictions to what Bernie said in testimony or [Madoff lieutenant Frank DiPascali] said to what we were told on our exam.” Suh later explained, “Meaghan [Cheung] did not think that this was likely to lead to an enforcement action or this was likely to lead to anything.” Lamore was assigned to other matters and had no further involvement in the Madoff investigation.

Madoff “astonished” that the SEC had blown it

On Dec. 16, 2008, five days after Madoff confessed to FBI officials, chairman Christopher Cox announced an internal investigation into the SEC’s failure to detect the Madoff fraud, and referred the matter to David Kotz, the SEC’s inspector general. After months of negotiations with Madoff’s lawyers, Madoff agreed to be interviewed, and on the afternoon of June 17, 2009, Kotz and a colleague arrived at the Metropolitan Correctional Center. Madoff was expansive and seemed almost eager to unburden himself of the secrets he had held so long.

Madoff said he was “astonished” that the SEC’s enforcement investigation hadn’t exposed his fraud, and added there were two times when he “thought the jig was up”: during the on-site exam by Lamore and Ostrow, because he thought they’d check with third parties, and when Suh asked him for his DTC account number, and he assumed the SEC would go to the DTC. “I thought it was the endgame, over,” he said. Madoff indulged his disdain for Lamore and Ostrow, referring to them dismissively as “two young fellows” who “didn’t understand what they were looking for.” He was especially annoyed by Ostrow, who “came in here like Columbo” and wasted his time looking at canceled checks. He said he was “astonished” they didn’t go to either the DTC, as Madoff had offered to let them do, or his purported trading counterparties. “It would’ve been easy for them to see,” he said. “If you’re looking at a Ponzi scheme, it’s the first thing you do.”

Kotz issued a detailed and unsparing 457-page report in August 2009. It should be required reading for every current and future staff member of the agency. Kotz concluded that there was no “misconduct” or inappropriate influence exerted on any individual staff member. Rather, the staff “never took the necessary and basic steps to determine if Madoff was misrepresenting his trading,” and “there were systematic breakdowns” in the investigation, which, if anything, seems an understatement. They narrowed the investigations to minor technical issues rather than confront the possibility of massive fraud. They didn’t reach out to the Renaissance officials and treated Harry Markopolos as a meddlesome fortune-seeker who was making their lives more difficult. They seemed more interested in proving him wrong than in catching criminals.

Still, for all the missteps by the SEC, it came amazingly close to catching Madoff. Thomas Thanasules deserves a promotion and recognition for spotting the Madoff issues in the Renaissance e-mails and bringing them to the attention of his superiors. Michael Garrity and others in the SEC’s Boston office [who were eager to pursue Markopolos’s claims] also showed genuine enthusiasm and an investigative bent. Would that their instincts had extended further into the agency.

Judged by the duration and magnitude of his fraud, Madoff would seem the most cunning and skilled of liars. That’s what David Kotz assumed when he began his investigation. “I assumed Madoff was a genius, a master, that nobody would have had a prayer of figuring him out,” Kotz said. But in fact, Madoff was no better than average, if that. Written records flatly contradicted his lies, had anyone bothered to check them. He repeatedly changed his story on numerous points: whether he did or didn’t trade options; whether he did or didn’t manage money for individuals; who did or didn’t handle his trading; how many clients he had; and how much money he managed. Madoff had the temerity to lie about what he said to Lamore to Lamore’s face. “He wasn’t a good liar,” Kotz concluded. “He couldn’t keep his story straight. He was no evil genius.”

As of late 2010, two years after the Madoff scandal broke, the SEC had taken no disciplinary or other measure against anyone involved in the various Madoff investigations. The SEC officials’ collective failure is, as Madoff himself put it, astonishing. It will surely rank as one of the greatest regulatory failures ever, not just because of the size of the fraud, but because it was staring them in the face.